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The Australian dollar surged back through 70 cents overnight

CHARTRES, FRANCE – AUGUST 16: Madeline Groves of Australia competes in the 200m Women’s Butterfly on day two of the FINA Swimming World Cup 2015 on August 16, 2015 in Chartres, France. (Photo by Aurelien Meunier/Getty Images)

The Australian dollar traded back above 70 cents last night making a high of 0.7017. That move was an incredible 1.4 cents above the low for the day of 0.6873.

Key to the rally according to Joseph Capurso, currency strategist at the Commonwealth Bank, was the promise by ECB president Mario Draghi of more easing in Europe and the biggest injection of cash into the Chinese banking system by the central bank in three years yesterday.

This combination Capurso said drove the Aussie, and its commodity cousins the New Zealand and Canadian dollars, around 1.5% higher on the day.

Capurso said the commodity bloc, as these three currencies are often called by forex traders, rallied because “two central banks from large economies easing their monetary or financial policies are supportive for currencies linked to global economic conditions.”

AUDUSD 15 minute chart –

Big currencies like the Australian dollar don’t usually move 1.4 cents in a day. So while the price action also reflects the sharp move higher in oil and commodity markets overnight it also suggests a short term market caught short. That is, traders who have sold Aussie thinking it will go down have to buy as prices move higher against their positions.

So Capurso and his colleagues at the CBA aren’t buying into this Aussie dollar rally.

“We are still not confident enough policy easing has been delivered in Europe and China to see the world economy recover strongly. Therefore, we still see material downside risks to AUD, NZD and CAD in coming months because of a weak world economy, low commodity prices and rate cut risks (except by the RBA),” Capurso wrote.

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